Calculating the Benefits of Keeping Customers

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Customer Loyalty > Best Practices > Calculating the Benefits of Keeping Customers

Calculating the Benefits of Keeping Customers
Hello all, I have a question which repeatedly pops up: where to invest your money: keeping customers or buying customers.
Measuring buying customer is easy. But how do we measure the benefit of customer retention (not just the save desk)? How to measure the lesser churn because of an activity on (part of) the customer base?
My feeling is that because keeping is difficult to measure (how can you proof that x customers stayed with your company rather than leaving as a result of your action) that most of funds typically, depending on markets, is spend on new sales.
Any help please?

Customers Keeping or Buying
Ahmed N. Qeshta
I invest my money in keeping my customers because the cost of buying customer are 25 times higher than keeping a customer.

My Customers Do Not Need Me
Larry S King
It has been my experience that companies and/or company executives oft times forget who made them successful in their respective businesses.
Customer loyalty goes hand in hand with customer service. Sad to say this important aspect of business is rapidly disappearing in the US, not just in large companies but also in the mom and pop businesses as well.
I learned a long, long time ago that my customers do not need me exactly... I need them and I go out of my way to treat customers with the respect and care that they deserve.

Not All Customers are Worth Keeping
Ethan Durda, Consultant, United States, Member
In general keeping customers (and happy ones at that) should be a primary focus of any organization, but that is not an absolute. In my consulting I have more than once suggested that a company drop a customer or two. In one case it was their biggest customer by sales.
While this particular customer was a huge buyer of product, the company was actually losing money on them with every shipment and had been for years as they had so many "sweeteners" in their deals. New customers were the only profitable ones and were keeping the business afloat.
This was a manufacturing industry, but it can be seen in other verticals as well with the possible exception of retail. The reality is that current customers should not be seen as a sacred cow that should be catered to even to the detriment of the company. Tough accounting and soul searching is important for both new and old customers. Putting yourself out of business to make a friend isn’t good business.

Measuring the Benefit of Customer Retention
Andy Mellor
I work in a small co. Providing technical industrial services. We take the retention of term contracts very seriously. Calculating the value of retention is easy knowing the amount of new business generated per unit cost of sales and marketing. Volumes with customers tend to grow over the years through sales of additional services to existing satisfied customers, because a customer satisfied with one service already trusts our delivery capability and experience. Our field engineers are therefore our best sales force.
When a customer leaves us, the question does arise as to whether this is through dissatisfaction or through cost. This is usually obvious, but we do have several customers who have come back to us after a year or two with the competition. This again is usually an easier sell than to a completely new customer.

Calculating the Benefits: Lifetime Value
Prashant Choudhari, United Arab Emirates, Member
It's been proven across industries that acquiring new customers takes as much as 5-7 times more efforts and cost than retaining existing one. There are enough case studies available on this. Regarding calculating the benefit: the simple method is to look at Lifetime Value (LTV) of existing if retained vis-a-vis new customer and the average ticket/purchase size of your existing customer. However remember: you need to retain a new customer at some time in the future too. But a bucket can not be filled if the leakage at bottom is as wide as the opening at the top.

Difficult to Measure the Benefits of Loyalty
Niraj Kumbhat
Customers are having many options available nowadays. The days of monopoly have gone. Particularly in India, customers are price sensitive and are looking for cut-throat prices. But yes, if the delivery is good and a relationship is maintained with the customer then one is going to get some privelege over others.

Customer Lifetime Value / Lifetime Value
Jaap de Jonge, Editor, Netherlands
I think Prashant is pointing in a valuable direction.
In the Customer Lifetime Value (CLV) concept, if a new (type of) customer costs €500 to acquire, and the CLV is €600, then the new (type of) customer is judged to be profitable, and acquisition of more similar customers is acceptable.
Similarly it appears to be possible to compare the costs of losing an existing customer with the CLV for this type of customers.
Who can explain in more detail how CLV is calculated?

Calculating Loyalty
Mrinal Ghosh, Business Consultant, India, Member
Loyalty can be calculated based on 3 metrics:
- Intention to continue
- Recommend the brand
- Continue using the brand.
The intersection of these will give you the % loyal to the brand. Although people might argue that recommendation or continue to use basically come from satisfaction with the product. But recommendation and intention to continue cannot alone give you % of loyal customers. Say for example in a monopolistic or oligopolistic market, you wont be able to determine loyalty with these two metrics. You need to check the overall satisfaction with the brand.

Calculating CLV: Recommended Reading
Marcel Wiedenbrugge, Consultant, Netherlands, Member
To Heins: finding a right balance is always the trick. As a company you need to focus on both keeping your (profitable) customers, growing & keeping smaller - but potentially big - customers and - unavoidably - getting new customer (preferably the right ones). About cost and revenues and profitability. If you work with ABC, then your finance department can easily tell you things like acquisition cost, revenues and profits. About CLV: one great read on the topic of customer loyality and profitability is The Loyalty Effect of Frederick Reichheld. I dearly recommend it.

Loyalty Cards May Help
Joseph , Director, Malta, Member
Such measurements are never easy because they are never on a ceteris paribus basis since, inter alia, they deal with changing moods and competitor strategies to redirect loyalties. One method to facilitate tangible calculations would be the issue of unique numbered loyalty cards for each customer renewable annually (with possible benefits for the customer). These could then be encouraged to propose the brand to new potential customers who will, in turn be provided with new unique loyalty cards. In my opinion, the best (and less costly) advertising comes through word of mouth between loyal and potential customers.

Losing an Customer is Losing Double
Magesh Kumar, Student (MBA), India, Member
To editor, I don't exactly know how to calculate CLV in absolute terms, but just want to share with you a thought that struck me with respect to the cost of losing an existing customer. I feel it involves economic costs too (over and above the accounting cost that can be calculated). Losing an existing customer is like giving him/her to your competitor, which means you lose out double in the race for market cap. Vis-a-vis your competitor.

Calculating Customer Loyalty
S Guin, Presales, India, Member
I completely agree with mr. Ghosh on this, assuming I am looking at service-industry, considering the fact that it is more or less oligopolistic with some exceptions (like, the hotel industry in Hawaii). However in the product-merchandizing most of the markets have reached saturation in terms of product-protoypes and manufactureres/retailers. Thus brand-satisfaction, customer retention success-rate through loyalty and referral benefits, etc. come into play. In simple terms, calculating customer loyalty can be a fn of the %age of customers having repeated interaction with us. The calculations can start from the very first interaction of the customer with us.

Customer Loyalty helps to Survive Hars Times
Sindiso Coleman Dumulomo Tshuma, Manager, Zimbabwe, Member
Customer loyalty is very important to the well being and livelihood of the company. This is particularly true especially in the service industry such as hotels or consultancy business where repeat business keeps you afloat as happened in Zimbabwe in the past 9 years where companies which where able to give good service to customers were able to survive the storm of bad country publicity internationally and still keep operating in the most unfavorable, unprecedented economic situation of all times. Those that did not bother with looking after the customers closed shop. However with improved economic climate those that remained opened will be miles ahead of their competitors.

Customer Loyalty
Joseph , Director, Malta, Member
One must not forget to mention the importance of interpersonal relationship; if there isn't one it must be created. Once created it must be nurtured continuously. This might sound a bit philosophical, but isn't it the basis of every type of relationship? It doesn't mean that there won't be disgruntled customers (variety is the spice of life). That some customers are difficult is a reality, but that falls within the 10% where you can't do anything about it, the other 90% is within one's hands to optimize customer satisfaction - even with the difficult ones.

Customer Value or Loyalty
The contents are good and very responsive. But there is no specific method to measure customer loyalty or value.

Customer Loyalty Measurement
Marcel Wiedenbrugge, Consultant, Netherlands, Member
To Nagaraj: I think that the answer to this question is too complicated to answer in just a few lines. About calculating CLV:
1) We need to define the lifecycle of a customer in terms of:
- How many years can a customer use the products / services and from what age
- How do customers needs and wants develop /change over time and how can the company anticipate on that
- You must measure those changes frequently (in terms of customer satisfaction)
- What will be the impact of competition over time
2) Then we have to relate that to sales and profitability
3) You have to measure, monitor and analyse migrations (up-, cross-selling, regular -> satisfied -> loyal, defections) over time.
So the best we can do is to analyze past behaviour in terms of sales / profitability / satisfaction / retention / defection and relate that to future perspectives for both our customer as our organization (= the ability to keep the value balance stable).

Customer Retention is Most Important to Make New Customer
MD Hafeez Ahmed, Consultant, India, Member
I am working on a special project of customer retention where I found keeping customer is very important. If a client switches to competive products, this doesn't mean he is not a loyal customer, the difference is you should not give the chance to the customer to switch to other services. There is a simple strategy we initiated to the existing customers of promoting the new options and benefits in which the expenditures for the company are less and more worthwhile for the customer. The main objective is the way of approach which matters a lot to retain customers for a longer duration. This policy would automatically bring customer loyalty, and the investment part for the new customer will be less because the existing customer will have a good experience..

Definition of Customer Loyalty
Tleli Makhetha, Business Coach, South Africa, Member
Marcel is correct, the answer is a little more involved.
1. A business has to first understand the critical success factors relevant to profitability and growth.
2. The next step is to calculate comparative numbers based on existing and retained customers. For example: the net margin per unit sale to an existing customer as against a new customer. Another one is what is the cost of getting a new customer to buy your new product as opposed to an existing customer.
The interesting thing though is that once you start tracking these numbers you will likely alter your strategy to either leverage on the lower cost of selling to existing customers or find ways of lowering the costs of selling to new customers. This makes it impossible to have an absolute answer but it provides you with information to keeps your strategy dynamic.

Customer is Always Loyal
Rajesh Sharma, Professor, Nepal, Member
It like believing the enemy. I.e. the customer will always be loyal towards us. To keep the loyalty, companies must regularly survey the customer needs and act on that.

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